ABC - COMING OF AGE

A special message from the features editor

Dear reader: Welcome to the first-ever edition of CMA magazine wherein we have dedicated all of our feature content to activity-based costing (ABC). We have done this because we realized that it is rare in the management accounting profession that a technique has had such a profound effect on the very fibre of our way of doing things -- basic cost accounting. No longer is ABC perceived to be extremist; now, it is as fundamental as double-entry accounting.

After 10 years of working with ABC and activity-based management (ABM), we are finally reaching a point in the technology development curve where a lot is known. It has been most fascinating to participate in the development of ABC with those, in the early days, who acted on faith to implement an idea that was only just emerging. They acted because they knew that the existing methods of cost accounting produced information that was wrong. Those pioneers worked with rough-hewn principles and software tools that were barely functional. A number of those organizations were rewarded with substantial gains in productivity as a result of finally having decent economic facts with which to make decisions and influence the performance of their people.

During the intervening years and thousands of applications, significant experience has been accumulated and the methods and software tools have improved dramatically. Gone are doubts about the validity of the approach. In fact we see more enthusiasm for ABC than we have ever seen before, but it is different. Initially the enthusiasm was driven by beliefs more than hard experience. Today, the enthusiasm is fuelled by hundreds of success stories. Of course there have been failures, but those had more to do with lack of management commitment and poor implementation than they did with the principles of ABC.

One thing that has become very clear about ABC is that it is an analytical management methodology; it is not an accounting exercise, nor is it a software-driven fix to management problems. Those who have good solutions approached ABC from the perspective of addressing the critical issues that face the business. These implementers took the time to understand the operational and economic structure of their business and then analysed the ways in which resources are consumed by activities and what the outputs of those activities are. This became the basis for changing the way the organization operates.

The very first ABC solutions were developed in manufacturing organizations, where cost accounting had its roots. ABC was successful in manufacturing because changing the competitive environment caused margins to shrink, and this created an urgent need for correct information. Accountants in service industries also needed a new costing technique, but had realized years before that manufacturing cost accounting was ineffective. So the service industry accountants were right to be suspicious, at first, about yet another new costing technique that was developed in manufacturing organizations. Of course, now that ABC has been proven, service organizations have accepted ABC as the only viable way to do cost accounting.

You have to have software in order to implement ABC, this is an undeniable fact. Consequently there is a remarkable amount of marketing hype coming from software developers. It has reached the point that we see many first time implementers making the mistake of believing that the decision on which software to buy will heavily influence their success. Experience would indicate that this is a poor assumption. Smart buyers ignore the sales hoopla and get into analysis of activities, as well as establish the design of their ABC solution before they buy software. Methodology and specific organization issues are far more critical than software gimmicks. Software is only a facilitator of the analysis and must conform to the design, not the other way around. Recently, after a shoddy application experience, one ABC software buyer lamented to us that the company chose the software, before it knew what it was getting into. The consultant, who only supported that particular software product, told them that it was the only one that truly does ABC. Today, this user has abandoned the original software and purchased another.

The feature selection in this month's edition of CMA magazine covers a variety of information and insights about ABC/ABM. In one of the articles, the early setback and consequent recovery of ABC implementation at Volkswagen Canada is chronicled. For those pioneers who backed ABC 10 years ago, the Volkswagen experience serves to justify their belief in the process, and their commitment to its value. In another article, Iris Carolfi explains how activity-based management can improve quality and control costs, and she provides some useful implementation steps. Don Lambert and John Whitworth describe what ABC does for service organizations; and Murray Best gives you the low-down on the leading ABC software products -- buyer beware!

We hope you enjoy this month's CMA magazine. For those readers who may have tried ABC, but have allowed it to drift away, unmaintained, please write to us and share your experience. For those of you who have implemented ABC successfully, please feel free to tell us your story -- how you approached it, to what you ascribe the greatest source of your success and finally, tell us about the results. For readers who have not yet implemented ABC, we think it will only be a matter of time before you jump on board, but please write to CMA magazine and share your views.

Paul Sharman

CMA Features Editor

Reprinted from the CMA magazine with permission from The Society of Management Accountants of Canada.